Political Ideals and Fiscal Cliffs: How to Cure the Post-Election Blues

“Both parties in Washington now agree that our country is headed toward a ‘fiscal cliff.’ The bad news: We just elected a guy whose campaign slogan was ‘Forward.’”

“…Turns out it is not all bad news for the Republicans. It seems that depression is covered by Obamacare.”

–Jay Leno

The American populace has been both participant and spectator in a compelling national reality TV show called “Election 2012.” It has dominated many stations, channels, and social media outlets, overtaking attention spans as voters have made and affirmed their decisions.

We listened to campaign rhetoric, advertisements, and debates. Some of us participated in the process actively, campaigning for the causes and candidates we believe in. Many citizens engaged in intense conversations about taxes, health care, foreign policy and the economy.

Meanwhile, candidates argued why their solutions could cure the country’s ills, and why their opponents’ ideas fell short. And as much as “change” and “hope” were evoked, too often, campaigns relied on smear campaigns and scare tactics. It’s no wonder that, whether their candidates won or lost, a landslide majority of Americans breathed a collective sigh of relief when the election was behind us.

But just when we thought the drama was over and it was safe to enjoy football or Farmville, rumors of financial doom escalated as the next political reality show debuted:

The Fiscal Cliff: More Suspenseful than Survivor!

The Fiscal Cliff refers to the combination of dramatic spending cuts and tax increases scheduled to take effect January 1, 2013, according to the terms of the Budget Control Act of August 2011. Designed to force lawmakers into a compromise, neither side would budge prior to the November election.

Deadlocked over whether to address the $1 trillion-plus annual budget gap with higher taxes or lower spending, Democrats and Republicans now have mere days to beat the year-end deadline They must agree on a plan to reduce the budget deficit and debt, or tax reductions set or extended to spur economic growth will end, raising taxes for most Americans. Additionally, investors would be hit with higher taxes on capital gains and dividends, and an unemployment benefits extension will expire at the same time.

What happens if we go over the cliff? According to the Congressional Budget Office, the higher taxes paid and lowered spending could together slice the $1.1 trillion deficit racked up in fiscal 2012 by almost $500 billion next year, which would vastly improve the government’s financial picture. However, the anticipated loss of consumption and jobs could push the unemployment rate over 9 percent and send the country back into a deep recession.

This situation and many others beg the question: We’ve elected candidates, but can they produce the results they promise?

Election campaigns perpetuate the myth that lawmakers can provide the solutions we seek. And with so much attention given to the political process, it becomes easy to believe that every issue has a political answer. But that’s “election Kool-Aid.” We debate which policies should be passed into law, but the reality is that no law can guarantee financial outcomes.

Governments strive to effect change by enacting and enforcing new laws – with taxes, regulations, incentives and punishments. But legislation cannot end global religious and political tensions, restore deflated real estate values, prevent natural disasters or put everyone back to work. This has been the case throughout history – under monarchies, Marxists or representative democracies. Regardless of the political structure, there are natural, social, and economic factors that can’t be controlled by legislation.

This doesn’t stop lawmakers from trying to control these uncontrollable factors, or from genuinely impacting the financial well-being of households, but national economic policies often do not achieve their intended results.

Social Security: A Case Study

The Social Security Act was signed into law in August 1935, Workers and employers began paying Social Security taxes in 1937, and in 1940, eligible retirees (those over age 65 who had worked a minimum number of years) began receiving benefit checks.

The initial tax rate was 2% (employer and employee paid 1% each), applied to a maximum of $3,000 in wages. The original Act called for gradual increases in the tax over the next 12 years. As an informational pamphlet explained, “…Finally, beginning in 1949, 12 years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.” (emphasis added)

Problem #1: Cost Overruns.

Between inadequate projections and cost overruns, due in part to increasing life expectancies and the Baby Boomer generation, the cost of Social Security has skyrocketed. More people are living longer and receiving larger sums of benefits than ever anticipated.

As the chart demonstrates, the Social Security tax rate increased over 600% in 50 years. The portion of income subject to Social Security tax has increased over time as well. Indexed for inflation, $3,000 in 1949 was the equivalent of $27,583 in 2010. The amount of income subject to Social Security in 2010 was $106,800.

Adjusting for inflation, the higher tax rates and higher income threshold result in a tax that is 8 times greater than the “most you will ever pay” promised in the original plan.

Problem #2: Something for Everyone = Not Enough for Anyone

According to the Social Security Administration, the average monthly Social Security benefit received by workers was about $1,230 in 2012, or $14,760 a year. A low-wage earner (with a $15,000 annual income), would receive Social Security benefit of $10,128/yr, or $844/mo, which equates to 67.5% of their former income. By contrast, an individual with an annual income of $110,000 would receive only 28.4% of their former earnings, or $31,260/yr., or $2,605/mo.

Social Security provides 90% of retirement benefits for 36% of people over 65, but for those counting on Social Security to be their “retirement plan” will be living very frugally. And of course, for Baby Boomers and younger, good luck! With Social Security outlays exceeding revenues in an progressively widening gap, it is clear that deep cuts or big changes are on the way.

Problem #3: If You Give a Man a Fish…

Government financial programs aim to compel citizens toward better outcomes by eliminating the decision-making process. Instead of encouraging saving, Social Security simply assesses a tax, eliminating the need for the employee to decide how much to save, and where.

But the “mandatory” saving of Social Security is not enough. If anything, it fosters a false sense of security. If someone desires financial independence, they are going to have to save additional amounts on their own, make thoughtful investment decisions, and monitor their progress.

The bottom line? There is no government program that delivers set-it-and-forget-it financial security. Achieving personal prosperity is not a job that can be delegated to an employer, a policymaker or anyone else; it is YOUR responsibility to build wealth for yourself and your family.

Elect Yourself to Build Lasting Wealth

The Solution is YOU. YOU determine your financial future – not the president, the congress, or any laws passed this or any other year.

More than likely, national health care costs (like the cost of Social Security) will be higher than projected. More than likely, most people will not get all the health care benefits they want or need. Likewise, anticipated benefits for taxes (lower national debt, more money for social programs, infrastructure, etc.) will probably come in below expectations.

Do not count on the government to bail you out – it is occupied with troubles of its own. Instead, pay attention to what you CAN control – your personal economy:

Take responsibility for your health care, prioritizing preventative care as well as health insurance.

Learn how to legally reduce your taxes and keep more of what you make.

Recession-proof your mindset by reading, studying, and mentoring with people who have created sustainable prosperity.

Engaging in the political process is an important right. But do so realizing that policy ideals and economic realities rarely mesh. Use the only approach that works: create your own financial path, and follow strategies to build wealth in any political climate.

WE’D LOVE TO BE ON YOUR “CABINET” OF ADVISORS! Contact us today for a free, no-obligation consultation.